High Utah tobacco tax boosts smuggling

Study • Report says a third of cigarettes in Utah now contraband; State Tax Commission doubts the stats.

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About a third of the tobacco smoked in Utah is now smuggled in, and bootlegging doubled after the state raised its cigarette tax from 69.5 cents a pack to $1.70 in 2010, a new report says.

However, Utah Tax Commission officials doubt the problem is anywhere near that severe.

"It's a simple function of high cigarette tax in Utah and low tax in neighboring states," says Michael D. LaFaive, co-author of a study estimating smuggling rates in the states for the Mackinac Center for Public Policy, a Michigan research and education group that promotes limited government and free-market solutions.

Utah's neighbors had much lower cigarette taxes in 2011, the year covered by the study. It was 55 cents a pack in Wyoming, 57 cents in Idaho, 80 cents in Nevada and 84 cents in Colorado. Arizona was higher at $2 a pack.

The study ranked Utah No. 9 among the states in 2011 for the most cigarette smuggling, jumping 10 places from a study done two years earlier.

The study estimates that 32 percent of tobacco consumed in Utah in 2011 was smuggled, more than double the 14.1 percent in 2009. The study used statistical models that compare actual legal sales to predicted state consumption based on reported smoking rates.

Of the contraband tobacco used in Utah, LaFaive told The Salt Lake Tribune that about 15 percent of it is "attributable to individuals crossing the border typically to buy smokes for their own consumption" or who buy them over the Internet.

"All the rest is basically commercial smuggling, long over-the-road shipments on a larger scale that are distributed by more organized individuals for profit," he said.

Frank Hales, deputy chief of auditing for the State Tax Commission, doubts smuggling to that extent in Utah. He said cigarette-maker Philip Morris does its own studies constantly to identify contraband nationally and fake tobacco stamps, and finds little in Utah.

He adds that undercover agents for the Tax Commission try to get Internet companies to sell them cigarettes  in violation of state law  "but they never do." With the state's relatively low smoking rates, he says other markets, such as Southern California, are bigger, more lucrative targets for smugglers.

Rep. Paul Ray, R-Clearfield, who sponsored the Utah cigarette tax hike in 2010, said state officials knew that such tax increases always boost smuggling and factored that into projections of the overall costs and benefits.

He says the increase was worth it even if the study is correct that smuggling has doubled.

"We do know we have stopped people from smoking, which was my goal," he said. "And our revenues still increased. So we have less smoking and more revenue." Tax Commission data show cigarette tax revenue skyrocketed from $49.9 million the year before the tax hike to $105.3 million the year afterward.

"Typically, smuggling spikes the first few years and then comes down as surrounding states raise their taxes," Ray said. "Things will level back out."

While the study says smuggling is high in Utah, it is only half the 60.9 percent smuggling rate estimated in New York  which has the nation's highest such rate and highest cigarette tax at $4.35 a pack, plus another $1.50 levied in New York City.

LaFaive says cigarette taxes are now so high in many states that it essentially creates "prohibition by price," which leads to spikes in smuggling.

"The creativity used to move the product [alcohol] during Prohibition was incredible. I see that today: cigarettes being smuggled in concrete barriers in trucks with false bottoms," he says. "You have a wholesaler in Detroit who has had people smash through the walls of his brick building to steal cigarettes. ... At one point he hired private-sector commando units to escort his trucks."

Scott Drenkard, an economist for the conservative Tax Foundation, says tax hikes have a downside.

"Public policies often have unintended consequences that outweigh their benefits," Drenkard said. "Dramatic increases in state cigarette taxes have yielded additional revenue for priorities like public health, but have also fueled the rise of organized crime and law enforcement corruption."

The Tax Foundation says most smuggling starts with criminals obtaining discounted packs in low-tax states to sell in high-tax neighbors, but may also include counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks or bribed officials turning a blind eye to illegal shipments. 

Cigarette smuggling in Utah

• An estimated 32 percent of cigarettes used in Utah are smuggled.

• About 15 percent of the contraband is from people buying their own cigarettes in neighboring states. The rest is bigger-scale smuggling.

• Smuggling more than doubled after Utah raised its cigarette tax in 2010 from 69.5 cents a pack to $1.70.

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